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Sears: Where Wishes Begin And Reality Is Ignored

Posted: Dec 03, 2007 12:21 PM by Glenn Curtis

Tickers in this Article: SHLD

Eddie Lampert may have a great reputation as a hedge fund manager, but he isn't having much luck running Sears Holdings (Nasdaq:SHLD) lately. The retailer's third-quarter results were a train wreck!

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Gruesome Quarter
In the period ended November 3, the company earned a sickening $2 million (1 cent per share). That's far below the $196 million ($1.27 per share) it earned in the same period last year. It's also 49 cents below what analysts had been expecting.

However, it's not even the company's bottom-line number that scares me; Sears' same-store and total sales numbers are the real nightmare. In the quarter the company generated $11.5 billion in sales, well below the $11.9 billion it generated last year. It was also lower than the roughly $11.6 billion that the Street had been expecting. Meanwhile total domestic comps were down 4.6%. This weakness was driven by poor performance at both its core Sears brand and its Kmart stores. Economic conditions, competitive factors and warm weather were to blame for the results.

Out of Time, Money and Options
In all honesty, I'm not sure what Eddie Lampert has left up his sleeve. I thought he was going to work out a deal to combine with another major retailer such as Home Depot (NYSE:HD) earlier this year. So far, the only move I've seen is that the company may be interested in buying Restoration Hardware (Nasdaq:RSTO), a relatively small hardware and furniture retailer with a foothold in California.

Frankly, I'm not impressed.

The lack of a real acquisition move coupled with the fact that its cash and equivalents at quarter-end stood at just $1.5 billion (versus $2.1 billion last year) is making me nervous - nervous that the company is running out of time, money and options. I'm worried about Sears' ability to survive going forward.

Optimists point to the fact the company is buying back stock. That's great; it's a sign the board thinks the stock has upside potential. However, if the business takes a turn for the worst and its cash balances start to dwindle, the buyback program could actually hurt Sears. What good will repurchasing a bunch of stock be if it needs money for advertising or to take advantage of other opportunities?

Bottom Line
Sears' third-quarter results were lousy. I think Lampert is a really smart guy who could still have a few tricks left; however I'm concerned that stiff competition and the lackluster economic outlook could cripple the company and its stock going forward.

For related reading, check out Get Tough On Management Puff.

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By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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